Konkana Khaund's Blog

Energy Performance Contracting and the Residential Sector

19 Dec 2013 | by Konkana Khaund
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Energy Service Companies (ESCOs) provide a range of services including audits, financing, installation and maintenance and are repaid based on the client’s energy savings. Energy Performance Contracting (EPC) allows private firms to enter into arrangements with building owners to reduce the energy consumption of their buildings through customized energy efficiency upgrades. Operating costs can be reduced and energy efficiency improved with no up-front costs and limited risks to the facility owner. Despite the success of EPC in non-residential markets, virtually little or no applications in the housing sector have been achieved in United States and Canada. To date ESCOs have focused almost exclusively on commercial and institutional buildings such as public facilities, hospitals and schools as they are sufficiently large scale, have simplified approval processes, and are easy to replicate. The residential market has been viewed as high risk and difficult to manage.

A relatively better success for EPCs in the United States residential sector however, points to the fact that with the right initiative this could be replicated as a good model for retrofitting residential developments in a much larger scale, just as their commercial and institutional counterparts. To date there is approximately over half a billion units that has been retrofitted by EPC contracts in the United States. Utility sponsored programs initially attracted ESCOs to the residential market where most retrofits were being done in single detached homes. With some waning of utility incentives, the focus has shifted over to social housing as an attractive submarket, given the fact that the scale of the projects is large, the housing is in poor condition and there is a need to cut operating costs.

In Canada, the high-rise apartment market and the medium-rise social housing market has been viewed as attractive EPC targets for some considerable time by ESCOs. These segments offer larger investment returns and greater control of day-to-day energy use in the buildings. Overall, there is a substantial energy saving potential in the residential market, particularly in light of the aging condition of the housing stock. For the high-rise market alone, the total investment potential is estimated to be within a few billion dollars by various housing and financial sources in Canada. And of the target market, nearly 25-30% is expected to be in need of major repairs, and therefore energy management can be effectively combined with significantly cost-effective renovation projects.

Of course there are critical barriers that have led to a slow interest in this market opportunity. Among the prominent ones, the inability to control occupant behavior to achieve effective energy reductions when compared to baseline consumption is perhaps the most significant one. Occupant education would have to be a key part of the initiative to overcome this barrier. Additionally, complexity of decision making, multi-layered contract structure, rent control restrictions, etc. will require legislative intervention.

No matter how effective the degree of changes are, it is predictable that ESCOs would only prefer to accept the high-value projects where margins can be maximized, and therefore majority of projects that could actually benefit from an EPC contract may tend to be grossly overlooked. Institutional intervention, particularly government-utility partnerships, is an important prerequisite for EPC contracts to enter the residential market. Most importantly the respective state/provincial governments, utilities, ESCOs and the financial and insurance sectors have to develop more concrete strategies to facilitate EPC entry into the residential sector. At present the framework of such strategic initiative leaves a lot to be desired. Greater focus on increasing market access and reducing the risk to a level comparable to other EPC market sectors need attention. Finally the power of demonstration projects cannot be ignored. Showcasing pilot projects, highlighting the operational dynamics, being upfront with initial mistakes made, and offering guidance to the industry on how to pursue similar project successfully could help propel interest and investment into this slow but promising segment of the EPC business.